December 31, 2008

Auto Destruct

It's been more than a month since the auto industry came to Washington, begging for a rescue. And, since that time, it's become clear just how dry Detroit's reservoir of goodwill has run. For conservative opponents of bailout legislation, like Alabama Senator Richard Shelby, the U.S. auto industry is an object of scorn—"dinosaurs," he has called them. For the liberals who support a rescue, like Connecticut Senator Christopher Dodd, Detroit remains an embarrassment. "I wish that these companies had not gotten themselves into this situation," Dodd said recently, noting that they need to undertake "painful, fundamental changes if they are going to be competitive internationally and viable in the long term."

Who can disagree? In today's political lexicon, "Detroit" has become synonymous with failure—a shell of a city inhabited by a shell of a once-mighty industry. It is, in various tellings, the product of individual achievement laid low by collectivism run amok, or of innovation smothered by addled corporate managers and sclerotic labor contracts. Libertarians against unions, environmentalists against gas-guzzlers, or car enthusiasts against bad engineering—everybody can find something to loathe.

But, for all of Detroit's mistakes, it is also a victim of something it did right: ensuring a middle-class lifestyle for bluecollar workers. When the carmakers, pushed by unions, agreed to provide workers with a steady level of purchasing power, comprehensive health benefits lasting into retirement, and various forms of workplace rights, they were promising something that all Americans covet. And, while the financial costs and managerial constraints associated with that effort have helped bring domestic carmakers to the edge of collapse, ultimate responsibility for this situation lies beyond Detroit.

In a more enlightened society, after all, government would have made those promises and extended them to all workers, thereby spreading the burden of financing them to all taxpayers. That's how it's done in Europe and in Japan—which, not coincidentally, is the home of Detroit's most successful competitors. But the U.S. government never took that step. So, instead of a public welfare state, we got a private one, administered for only some workers and paid for by their employers. Sooner or later, this arrangement was bound to fail.

The creation of this privately run welfare state came neither easily nor quickly. It was the result of a decades-long transformation, carried out in two stages: first, when unions took advantage of New Deal legislation to transform life on the factory floor; then, when unions used their bargaining power to secure more generous compensation. And, to appreciate just how dramatic those changes were, it's worth recalling what life as an autoworker was like before this transformation began.

Building cars has never been cushy. And, as late as the mid-1930s, it was a good deal worse than that—particularly during times, such as the Great Depression, when the high demand for jobs put workers at the mercy of management. At factories like the General Motors complex in Flint, Michigan, work was tedious, physically demanding, and frequently dangerous. Injuries abounded as foremen sped up assembly lines in an effort to weed out weaker laborers. Workers were afraid to take breaks lest capricious supervisors give away their jobs. "If guys had to urinate or whatever, it went in their pants or on the floor," recalls Arthur Lowell, now 91, who started working in the Flint factory in 1936, when he was 18. "The boss could fire you if he didn't like your looks, so you were very careful about what you said."

The story was the same throughout the auto industry—and there wasn't much workers could do about it. They didn't have formal or legal channels for recourse. Collective action wasn't much of an option, either, since carmakers were under no legal obligation to bargain with unions and had few constraints on their anti-union activities. When workers went on strike, companies brought in permanent replacements; when workers staged occupations, companies hired spies and security forces to infiltrate labor efforts and, if necessary, take out protesters by force.

In 1935, however, President Roosevelt signed the Wagner Act, which forced companies to recognize unions. Late the next year, members of the fledgling United Auto Workers (UAW) staged an epic 44-day occupation at the Flint complex where Arthur Lowell worked. The "Great Flint Sit-Down Strike," as it became known, ended when GM finally agreed to recognize the union. Subsequent negotiations brought modest pay raises and what labor historian Nelson Lichtenstein describes as a system of "industrial justice"—work rules, seniority privileges, and grievance procedures designed to protect workers from random firings and to allow them to stay with the company even as age eroded their physical skills. It was suddenly possible to think of GM as a career, just like their supervisors did. To this day, workers in Flint wear white shirts on February 11, the sit-down's final day, to reaffirm the essential credo of those strikers: Factory workers deserve as much respect as their management.

GM's clout and size meant others would inevitably follow. Within a few years, nearly the entire auto industry had recognized unions. But if, by the 1940s, the typical factory worker had won a fairer and safer workplace, he still lived in a world of financial insecurity. Every time the economy slowed down, factories went idle and workers ended up on unemployment. And, even in the good times, workers saw their standard of living slip because of inflation, which was a recurring problem after World War II.

The UAW agitated again—and, this time, the industry was more eager to compromise. In 1950, General Motors agreed to provide regular "cost of living adjustments," so that paychecks would keep pace with inflation. It also pledged large payments toward its workers' health insurance and pension benefits—payments that would grow even larger in future contracts. Five years later, Ford made a historic decision to create a special fund for supplementing unemployment benefits. That way, even when the plants weren't operating, workers could keep collecting decent paychecks. (The payments to that fund would also increase, until eventually workers could get almost all of their regular pay during plant closings.) In each case, one carmaker's agreement set a standard that the others had to follow.

This "Treaty of Detroit," as Fortune memorably called the 1950 agreement, did more than broker peace between labor and management. It completed the evolution that had begun in Flint, reserving for workers a place in the middle class. Homeownership. New cars and college tuition for their children. The dignity of a career. Now guys on the line had those, too.

For many unions, achieving such terms for their members would have been enough. But, for most of the UAW's history, the union's leaders have said they were fighting for all working Americans, from the poor right up to the middle class. Walter Reuther, who helped organize the Flint strike and went on to serve as UAW's president for more than two decades, called for solidarity and practicality. "We are not going to operate as a narrow economic interest," Reuther vowed. If a unionized autoworker's standard of living rose too far above the typical American's, he knew, it would breed resentment.

Up through the 1960s, this seemed like a pretty distant concern, in no small part because UAW members' income gains had such huge ripple effects on the economy. Manufacturing dominated the economy, and unions, like the UAW, dominated manufacturing. Even though constantly rising wages helped create what's known as a wage-price spiral, or repeating cycle of inflation, the net effect still seemed to be positive. Between the 1940s and '70s, real wages—that is, wages adjusted for inflation—for the typical American worker doubled. As Paul Krugman, the Nobel Prize-winning economist, concluded, "everything we know about unions says that their new power was a major factor in the creation of a middle-class society."

Still, the UAW had even bigger aspirations. It leveraged its organizing success into political clout, on behalf of progressive economic legislation. It fought for more generous unemployment insurance and won. It fought for the extension of labor-law jurisdiction to African American farmworkers and won again. (This presaged the UAW's strong commitment to civil rights in the 1950s and '60s.) As Harold Meyerson noted recently in The Washington Post, "The UAW not only built the American middle class but helped engender every movement at the center of American liberalism today."

Overall, though, union efforts to secure legislation in Washington were never as successful as the efforts to win raises at the bargaining table. Along with other unions, the UAW fought—but lost—a battle to block enactment of the Taft-Hartley Act in 1947. Taft-Hartley radically altered the legal landscape for legal organizing—allowing, among other things, states to prohibit closed union shops. Thanks to that provision, states across the South and the West were able to pass so-called right-to-work laws, making the establishment of unions in those states difficult if not impossible. The wide-open organizing days of the Wagner Act were over.

Perhaps more famously still, the unions failed in their quest to win national health insurance. The UAW was an early and vocal advocate for universal coverage. But the best it could do was to help secure the passage of Medicare and Medicaid in the 1960s—a huge victory, but one that still left large chunks of the working-age population without health insurance and left even retirees needing supplemental coverage.

The autoworkers, of course, had these things. Their collective bargaining agreements guaranteed them not just insurance but generous insurance—and not just for themselves but for their spouses, into retirement and even as widows (or widowers). They cherished these gains and, after careers spent doing tough physical labor, many needed the medical coverage. But the lavish insurance was creating precisely the sort of disparity that Reuther had feared. It was a sign of things to come.

If the postwar boom had lasted beyond the 1960s, none of this really would have mattered that much, since, in the good times, management seemed content to pay a high premium for keeping peace with unions. But it was only a matter of time before the financial burden of running this private welfare state rendered U.S. manufacturers vulnerable to cut-rate competition—whether from across the ocean or below the Mason-Dixon line.

Health benefits, and retiree health benefits in particular, became the most glaring problem, since foreign competitors didn't have similar burdens. Workers in the factories these companies maintained abroad benefited from national health insurance programs. Workers in the plants these companies established here didn't have that advantage. But, with no unions to please, the companies didn't have to promise such generous benefits. And, since the plants didn't start up until the 1980s, they also had younger workforces—which meant many fewer retirees. By 2007, estimates showed that so-called legacy costs alone meant U.S. auto companies had to add a few hundred dollars to the sticker price of each vehicle. As Princeton University economist Uwe Reinhardt quipped, GM had become a giant social-insurance program that just happened to sell a few cars on the side.

It wasn't just the benefits in union contracts that were weighing down the car industry. It was also some of the job protections, including the system of workplace justice dating back to the 1930s. Work rules and grievance procedures designed to protect diligent workers from unfair managers sometimes ended up protecting less-than-diligent workers from appropriate oversight. These problems were not the only or even primary cause of the car industry's struggles. But even union supporters concede that the legacy costs created a real burden—particularly once, in the wake of the 1970s oil crunch, American consumers gave Japanese cars a close look and discovered they were delivering better quality and higher fuel efficiency, all at lower cost.

To become more competitive on price, U.S. automakers began doing what all manufacturers were doing: outsourcing what they could, to non-union companies at home and abroad, thereby shaving their labor costs. The union fought many of these moves, perceiving them as the latest in a long line of business assaults on labor. But the UAW also understood the financial reality, finally agreeing last year to a breakthrough contract designed to bring overall compensation closer in line with that of foreign-owned competitors. It slashed wages for some newly hired workers and vastly reduced the automakers' liability for retirement health benefits. It also streamlined the old system of work rules and grievance procedures. The UAW's Ford contract, for example, reduced for the entire company the number of skills classifications from 350 to 22, while allowing regular assembly-line workers to take on routine maintenance work that had previously been reserved for other workers.

All of this promised to make the Detroit carmakers more competitive with foreign counterparts. And the changes in production methods—designed to replicate the fast, flexible style of Honda and Toyota—were necessary. But, if the 2007 UAW agreement represented a lifeline for the industry as a whole, it also represented a death knell for the old way of doing things. No longer would the auto industry guarantee its factory workers a middle-class way of life, because it simply wasn't possible for a company to accomplish that on its own. The global economy had rendered the Treaty of Detroit null and void—and pushed the ambitions of Flint's sit-downers farther out of reach.

To hear some critics tell it, this change is long overdue; the reason so many Southern Republicans oppose the bailout right now is that the 2007 contract won't drag down autoworker compensation quickly enough. Alabama Representative Spencer Bachus said, "I'm sure that I'm going to be asked, 'Congressman, I work at Honda' or 'I work at Mercedes. I get $40 an hour [including benefits]. Why are you going to take my tax dollars and pay it to a company that's paying their employees $75 an hour?'"

But is the problem that UAW members get too much? Or that everybody else gets too little? There's a broad consensus that, over the last 30 years, real wages for the typical American worker have stagnated—in contrast to the 30 years before that, when unions thrived and real wages doubled. As an exercise, I asked Dean Baker, from the Center for Economic Policy Research, to calculate informally where wages for the typical working-age American would be if they'd continued to rise as they had done before the 1970s, while the unions were strong and helping to raise living standards for everybody. He determined that somebody between 45 and 55 years old, roughly the average UAW age today, would be making about $25 per hour—which is very close to the $28 per hour the typical UAW member makes. Factor in the (slightly) higher cost of living in the upper Midwest, where the auto industry is concentrated, and the figures would be even closer.

Data like that suggest that the insight of Reuther and his early UAW counterparts was right—that unionizing more of the workforce really would help raise everybody's living standards. Passing legislation that would allow workers to ratify unions quickly by written affirmation, as Canadian workers commonly get to do, could help organizers fight employer anti-union campaigns and break through some of the roadblocks thrown up by anti-union laws like Taft-Hartley. And particularly in the service economy, where outsourcing to low-income competition would be more difficult, greater union presence could have the same sort of ripple effects that organizing the autoworkers back in the 1940s and '50s did.

But, even if the government enacted more progressive labor-law legislation, the realities of the global economy—and the existence of right-to-work states—will always limit labor's unilateral power to raise wages. Putting so much of the burden for rising living standards on the backs of companies again simply doesn't seem viable. If the idea is to resurrect the Treaty of Detroit, or at least its spirit, there's got to be a different way.

Fortunately, there is. It's a model for the welfare state that already exists in other parts of the world and that, as it happens, has been getting a lot of international attention in the last few years. It's the Nordic or Scandinavian model, so named for the part of Europe where it's practiced, and its philosophy is simple. In these countries, government guarantees everybody, even blue-collar workers, most of the things Detroit once guaranteed its workforce—like middle-class wages, full health benefits, and subsidized day care. The government also guarantees nearly full incomes for the unemployed. Organized labor is still a big part of the picture; Scandinavia is actually the most heavily unionized part of Europe. But unions there serve a somewhat different function. Instead of trying to restrict hiring and firing—or, for that matter, obstructing trade—they focus on improving labor conditions and training displaced workers to find new work. They have a less adversarial relationship with management, although that has a lot to do with the fact that Scandinavian employers don't constantly attack unions the way American employers do.

Even though it takes high taxes to support such generous government programs, the Scandinavian economies are strong. That's led some center-left economists to suggest that this model for the welfare state represents the best hope for guaranteeing the kind of economic security companies once provided, but no longer can. As it happens, President-elect Obama's agenda includes universal health insurance, more subsidized child care, and better worker retraining—not to mention labor-law reforms. And, while Obama hasn't been talking up Sweden lately, his approach to policy suggests that he, too, believes government must assume the responsibility for providing benefits—and guaranteeing livelihoods—that once belonged to corporate America.

Of course, even if Obama succeeds, it may come too late for the automakers. On the same day I visited Arthur Lowell, I drove into Flint to get a glimpse of the place where it all started, the old GM plant where he and his co-workers went on strike for 44 days. There's almost nothing there anymore: GM has razed the factory buildings. But, as I traversed a small bridge over the Flint River, I spotted a small historical marker commemorating the strike, and the violence that injured 27 people until "GM recognized the UAW as the bargaining agent for GM factory workers." I looked around at the flat, fenced-in wasteland around the sign, trying to imagine what it looked like when it was in full swing—or when the union staged that famous strike. Then I walked away, as a light snow obscured the sign and cold wind blew through.